Next fiscal’s 7.5% growth rides on 4 thrust vectors: CRISIL

NPA cycle set to peak-out, steel sector resolution will be a big leg-up GST streamlining key to reversing working capital stretch, business confidence

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India’s growth dynamics next fiscal and beyond depends on four thrust vectors – resolution of banking sector stress, rural rejuvenation, relentless implementation of reforms, and rising global growth, CRISIL said in its report titled ‘The FouRs of Growth’ released today as a part of its India Outlook Series.

GDP growth is projected to pick up sharply to 7.5% next fiscal from 6.5% expected this fiscal, propelled by domestic consumption, policy push, and synchronised global growth.

The next fiscal offers the best chance to move the needle on resolution of stressed assets, estimated at 14% as of March 2018 for the banking system. This will be driven by the time-bound process initiated by the Reserve Bank of India (RBI) under the Insolvency and Bankruptcy Code (IBC), which could partially correct an ecosystem excessively skewed against creditors.

Says Ashu Suyash, Managing Director & CEO, CRISIL Ltd, “While these are early days, initial indicators do lend hope. We are particularly positive about the steel sector, where four large accounts have aggregate debt of Rs 1.3 lakh crore, given strong prices and uptick in domestic demand. Quick resolution of some large stressed assets cases is critical to establish the credentials of the new process, boost confidence of bankers and help kickstart the recovery process on a wider scale.”

To be sure, haircuts on many assets are likely to be deep, on average 60% for the top 50 stressed assets as per a CRISIL study. As a result, provisioning will remain high, depressing bank profits next fiscal, too.

On the positive side, the credit cycle is bottoming out as reflected in CRISIL’s sharply improving credit ratio – upgrades outnumbering downgrades by almost two-to-one in the first nine months of this fiscal – and with fresh slippages to NPAs declining. Better macro environment and the turn in asset quality cycle will help spawn an uptick in credit offtake that’s critical for meaningful improvement in growth.

Next fiscal could also define whether other landmark reforms implemented over the past couple of years – the Goods and Services Tax (GST), the Real Estate Regulatory Act (RERA), and Ujwal Discoms Assurance Yojana (UDAY) – lift India to a structurally higher growth trajectory.

Says Prasad Koparkar, Senior Director, CRISIL Research, “Of the reforms, stabilising GST implementation is critical. Our analysis of many listed or CRISIL-rated companies shows that GST teething troubles have stretched the working capital cycle for many mid- and small-sized companies – up to 10% – and also delayed refunds to exporters. Ironing these out on priority and improving compliance – with only 60% of registered dealers filing returns currently – is necessary for getting business confidence back and ensuring that fiscal targets are met.”

The implementation of UDAY and RERA remains sub-par and need a stronger push by states for full benefits to accrue over the next few years.

On the other hand, there is visible traction in affordable housing – another policy thrust of the government – with the number of houses approved under the Pradhan Mantri Awaas Yojana (Urban) increasing by over 50% in the2past 5 months. The momentum would gather pace next fiscal, in CRISIL’s view, with higher budget allocations and increasing attention of private players.

The renewed, and unmistakable, thrust on rural economy in a pre-election year can lift farm incomes* by 25-30% if the budget announcements about fixing the minimum support price (MSP) at 1.5 times the cost of production, and compensating farmers for the differential in MSP and mandi prices, are implemented effectively.

The report shows that spending push by states has a far greater impact on agricultural GDP than the Centre. Therefore, the Centre will have to collaborate well with states to generate the desired impact.

In the backdrop of improving domestic and global macro environment, CRISIL expects India Inc (excluding banking, financial services and insurance, and oil & gas companies) to post double-digit earnings before interest, tax, depreciation and amortisation (EBITDA) growth for the first time in 8 years.

But the private sector investment cycle, the bugbear of the past few years, will remain subdued due to low capacity utilisation across many core sectors. Additionally, the resolution of stress assets in banking can lead to capex deferral or decline in sectors such as steel. Our analysis suggests potential additional supply of 4-5 million tonne of steel over next 2-3 years as acquirers ramp up the utilisation rates, thus impacting capex decisions of over Rs 35,000 crore.

Interestingly, despite rising protectionist noises surrounding trade policies, global growth is gathering pace, and the momentum in global trade is expected to continue in 2018 as well. However, this is unlikely to buoy India’s exports to the highs seen in 2004-2008 or 2010-2012.

With sector-specific structural issues in pharmaceuticals and IT, and continuing obstacles of poor logistics infrastructure, higher cost of capital and poor labour productivity impacting the competitiveness in traditional sectors such as textiles, leather and footwear, India may not fully benefit from the uptick in global trade. Many of these issues need urgent mending as global growth is unlikely to sustain at these levels beyond the next 1-2 years.

The key risks to our forecasts stem from inability to resolve GST-related issues quickly and fiscal stress leading to a cut in capex by the government.

The high, and increasing, reliance on non-budgetary resources to support spending on affordable housing, rural roads, and railways is another key monitorable.

On the global side, faster than expected rate increases by central banks leading to disruptive winding down of leverage and global financial market flows, flashpoints in trade policies, and geopolitical events impacting crude oil prices are the key risks that need close monitoring.

*Farm incomes computed for the crop year (July to June) is an aggregation of kharif as well as rabi incomes for top 5 crops – wheat, paddy, gram, cotton and sugarcane – which will constitute for over ~60% of sown area